1. RMI Intro to Surety plus … “Prof V goes back to Campus…”

2. Surety • Prof V • CEO Emeritus CNA Surety Corp • Prof Emeritus UIUC Finance • EVP Surety Arch Insurance Group

3. Surety • Will introduce some new concepts to you • Overview of surety business… • Pre-qualification process… • Compare to Insurance & Banking.. • Overview of claim process… • Current issues…

4. Surety • What is surety ? • Ancient process • Biblical commentary • Babylonian • Roman times • English history • U.S. history

5. Surety • Personal surety • Legal development • Common law v statute • Statute of frauds • Development of corporate surety

6. Surety • Essence of the surety relationship • Three party arrangement • Surety guarantees the obligation of a primary obligor (principal) to a third party (the obligee) • Surety -- Principal -- Obligee

7. Surety • Industry highlights • $ 5 billion annual business -approximately 1% of p/c revenues • 135 or so groups of companies write bonds in the USA • Multi-line and specialty companies • Top ten write approx. 70% of business

8. Surety • Bonds support both public and private transactions • Bonds are typically statutory in nature • 85 to 90% of contract industry premium relates to public works projects • 99% plus of commercial premium relates to statutory obligations

9. Surety • Classifications of bonds • Contract • Commercial

10. Surety • Contract • Bid • Performance • Payment

11. Surety • The bid process • Discussion • Underwriting/pre-qualification process • The three Cs of Credit extension • Character-Capacity-Capital/Credit • An expensive and in-depth process

12. Surety • Character • Too often a given, but essential • Stature in community/reputation • Relationship with other business partners • Experience says watch out if an underwriter is aware of character issues

13. Surety • Capacity • Proven track record on similar size,scope and location of work • Organization • Comprehensive business plan • Performance record plus the ability to meet obligations on current and future work load, bonded and un-bonded • Continuity plan

14. Surety • Capital • CPA certified audited f/s for three to five years • Work in process (WIP) for bonded and un bonded work • Investment strategy • Affiliated businesses • Perform complete analysis • Trends over time in profitability,liquidity and leverage • Credit history • Bank relationships • Accounting system/cost control system • CFO/financial staff • Reputation of CPA performing audits and other services

15. Surety • Commercial • Fiduciary • License and permit • Court • Public official • Miscellaneous • Fidelity

16. Surety • Some key distinctions … Surety and Insurance • Two party (insurance) v three party (surety) • Principal (insured) is not directly protected by bond • Third parties receive benefit • Law of large numbers does not apply • Loss expectation v no loss anticipated • Principal is always primarily responsible for completion of the obligation • Surety obligations are generally non- cancelable • Premium non-payment not a reason for cancelation

17. Surety • Surety and banking • Surety like banking is an extension of credit; monetary v non-monetary obligations • Analysis of business very similar • Repayment of credit or obligation • Banks and sureties expect repayment • Banks and sureties do not expect a loss • Rights to pursue defaulting principal • Collateral • Indemnity

18. Surety • Claims process • Number of alternatives • Surety’s responsibilities • Fulfill the commitments to various stakeholders • Performance • Payment • Other

19. Surety • Industry issues • Surety has cycles too… • Hard and soft markets impact surety • Regional and national economic impact • High profile cases/issues • Enron and others • Sub prime • Capacity on major accounts • Large and mega contracts… • Fortune 1000 exposures…

20. Surety • Industry issues • Expense structure • Acquisition • Underwriting • Reinsurance • Capacity • Pricing • Legacy issues • Alternative products • Insurance v surety • Pricing of surety • Commercial exposures create real pricing issues • Rating plans are antiquated

21. Surety • International • U.S. v Guarantee market throughout the world • The European Union • Other surety expansion • Critical issues on business practice • Cultural differences • Finding the right partners

22. Surety • Why did the Prof go back to business….

23. Surety • Final thoughts…. Mark Vonnahme EVP, Surety Arch Insurance Group Mvonnahme@archinsurance.com 215-606-1701